SA and HA. In Sweden, as well as in many other countries, there is a concern about the high implicit marginal tax rates of an increase in working hours for low-income
earners. These effects are due to a combination of a relatively high income tax rate on low earnings combined with a 100 percent implicit tax on welfare benefits. The results
from the policy simulation indicate that a significant reduction in income taxes for low-income earners along with a 25 percent reduction in the maximum benefit levels
in both SA and HA generate substantial welfare effects. Using equivalent variation EV as our measure of the welfare effect associated with the tax and welfare change,
we find that there are welfare gains for virtually everyone in the sample from the tax and transfer change. However, there are dramatic differences in EV depending on the
level of prereform household income. The estimated average EV for the poorest 10 percent is SEK 11,345 per year compared with SEK 57,195 per year for the
richest 10 percent.
The remainder of this paper is organized as follows. Section II provides a descrip- tion of SA and HA in Sweden. In Section III, the main features of the Swedish income
tax system is presented. Section IV presents the economic model and the empirical specification while Section V describes the data used in the analysis. In Section VI we
present the results, while Section VII concludes the paper.
II. SA and HA in Sweden
The Swedish welfare system is well known internationally for the high degree of income security that it provides for its residents. Recently, this gener-
ous system has been the target of a number of reforms, mainly due to the recession that hit Sweden in the early 1990s.
As an ultimate safety net, people in Sweden are covered by SA. In order to be eli- gible for SA, all other welfare programs, such as unemployment compensation, HA,
child allowance and various pensions must be exhausted first. The benefit levels vary across family types and are intended to cover expenses essential for a “decent” living.
To be eligible for SA benefits, a family must have a net income below a maximum benefit level.
5
The benefit levels were, until 1998, determined in each of the 288 municipalities in Sweden and serve as guidelines for the social worker who decides
the actual size of the benefits. However, as of January 1998, the regional variations in the benefit levels were replaced by a national, uniform benefit level. SA benefits
depend on family composition and they are reduced at a 100 percent reduction rate as the family’s net income rises. Figure 1 illustrates how the benefit levels change with
net income for a typical two-parent household with two children. The figure also shows benefit levels in 1993 and in 1999. As the benefit levels varied across regions
in 1993, Figure 1 shows the average of all regions for that year. For most municipal- ities, SA generosity has been reduced between 1993 and 1999, and the difference
5. For example, in 1999, the maximum benefit level for a four-person household varied between SEK 7,480 and SEK 9,160 per month depending on the age of the children. The benefits are meant to cover expenses
for so called necessary consumption, such as food, basic clothing, leisure, health, newspapers, telephone, and fees for TV.
Flood, Hansen, and Wahlberg 1011
between the average SA benefit level in 1993 and the corresponding level in 1999 is around 20 percent.
Households who are eligible for SA may also be eligible for HA, which is deter- mined by nation-wide benefit rules. The allowance is targeted at families with chil-
dren. In 1993, households without children could qualify for HA, but a reform introduced in 1997 essentially eliminated that possibility.
6
Eligibility for HA benefits depends on household income, cost for housing, and the size of the household. In
Figure 2, we show how HA changes with changes in family income for a household with two children. In 1993, the amount of HA a family receives is constant for
incomes below SEK 90,000. For higher incomes, the benefits are reduced at a rate of 20 percent. In 1993, about 50-70 percent of the housing cost is covered by HA for a
family with an income below SEK 90,000. As shown in Figure 2, HA benefits are less generous in 1999 compared with 1993. The structure of the HA system is the same,
and the reduction rate is also similar. However, the income level after which benefits
6. However, single persons younger than 29 years old without children could still qualify for the allowance.
The Journal of Human Resources 1012
120000
Amount of Bene ts 100000
Social Assistance in 1993 Social Assistance in 1999
80000 60000
40000 20000
Net Income 20000
40000 60000
80000 100000
120000 140000
160000 180000
200000 220000
240000 260000
280000 300000
Figure 1 SA Benefits in Sweden, 1993 and 1999
Note: The benefits are calculated for a two-parent family with two children, aged 1 and 4, and are expressed in 1999 SEK.
are reduced is substantially lower, SEK 60,000 in 1999 compared with SEK 90,000 in 1993.
III. Income Taxes in Sweden
